Shares that Double and Halve

Posted in Traders' Delusions, Submitted by Trading Critic on Wed, 2006-10-18 09:27.
There are stocks on the Australian Sharemarket that readily double or halve in value the short term

There are stocks on the Australian Sharemarket that readily double or halve in value the short term. Better yet, there are traded financial instruments that are linked to the volatility of the larger valued stocks which also are highly volatile. The former are simply vanilla stocks. The latter example relates to derivatives, namely warrants and Exchange Traded Options (ETO's).

There are stocks that increase their value exponentially on the exchange markets in the short term. It is not only restricted to the Australian Stock Exchange (ASX) but this effect translates to exchanges around the world. What you are looking for are the stocks that are plainly labelled as "penny dreadfuls" or "penny stocks". One of the main characteristics of these stocks is that they are cheap, usually under a dollar or even a few cents a share. They are highly speculative and they don't have much trading volume if at all. The ASX is famous for these types of shares especially in the resources arena, as they let any speculator to invest their money hoping to hit the big jackpot. When a miner or an exploration company finds more to dig, that's when you'll find their stock to escalate. If the news that the property they own or their exploration hasn't reaped any rewards find their stock slide into the doldrums. This type of stock price movement isn't restricted to resource stocks, other stocks like pharmaceuticals or even retail have their share prices jump on the back of news of any success.

Derivatives. Be warned, derivatives are risky. Risky because they require a little more know-how and experience to be used effectively. Risky because they are a double edged sword. – profits are exponential: losses are exponential. Warrants and ETO's are both traded on the ASX. The catch is that warrants is basically a synthesised market created by the market makers – the major stockbroking companies that choose to participate. With ETO's what contracts you can write or trade is limited by the trading volume.

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T3 Telstra Deja Vu

Posted in Traders' Delusions, Submitted by Trading Critic on Mon, 2006-10-09 07:43.
Faustina  'Fuzzy' Agoiley seeing Deja Vu in the T3 Telstra (TLS) Float

Here's the main reason why I don't read tabloid newspapers: they give useless mish mash information that does no one any good. One case in point was a short piece about the upcoming Telstra (T3) (TLS) float in the one-page "Business" section of the The Saturday Daily Telegraph. It took a quote from the Channel Ten "Video Hits First" show host: Faustina "Fuzzy" Agoiley (The woman that reminds me of a golliwog because of her hair). The "news" piece reported that she had been one of the 1.6 million shareholders that had bought into T2 at $7.40 a share. Asked about whether she would invest more of her money into Telstra in the T3 float she sensed a case of déjà vu stating that: "I wouldn't invest into [T3] because I'm still burnt from T2 and I'm still looking for a long term gain from that so I wouldn't see why people would want to invest more money into those sorts of shares."

Now what good is that reporting that crap in the newspaper? As a trader it makes no sense at all. As an investor the reasoning in that statement isn't logical. Okay, she has the right to claim she has been burnt from the Telstra (TLS) share price halving in value and hence wouldn't invest in T3. If she stopped there, I would be empathic to her case. I have a problem with the two last points: the long term gain and the point about not investing in "those sorts of shares."

If I was really an investor and I was really in for the long term I would see the upcoming float as an opportunity to buy into more Telstra (TLS) shares. I would see it as a discount. As an investor, if you had no belief in the shares, you would have let go of those shares a long time ago. As a trader, if you were to buy into this cheaper price with a bullish view and you are still holding your T2 shares then you are effectively lowering your break even price.

Finally, what does she mean by "those sorts of shares"? Shares that you put money into and which halve in price? I didn't know there was such a classification.

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CMC Markets Margin Call

Posted in Trading Services, Submitted by Trading Critic on Wed, 2006-09-27 05:28.
Ever wondered what a Margin Call notice looks like? Here is an actual margin call from CMC Markets

Have you ever wondered what a Margin Call looks like? Here is an actual margin call notice from CMC Markets I had the benefit of receiving by email the other day. Why did I receive it? Well… I had recently withdrawn some money from my trading account, effectively taking some profits. Then a recent trade went against my position, so the account went into the red on the margin side because of the lack of funds.

If you don't know anything about CMC Markets, they are a market maker which means that for the financial products that they provide: namely derivatives of the CFD (Contracts For Difference) type, they derive their prices of their products from the market. They do this for markets like the Australian Stock Exchange (ASX), NYSE, NASDAQ and more. Because it is a derivative product, there are many terms and conditions that make this product work - too many to describe here. But here's an interesting thing to note: CFDs are legal in England and Australia among other places but illegal in USA. Go figure. (I think it has something to do with their options/derivatives markets)

If you do get a Margin Call from CMC Markets don't fret too much. They don't immediately do anything to your account. You just simply get continuous emails either on the hour or whenever the price of your portfolio/stock/share/forex trade or whatever dips against your position (either long or short) to negate your margin in your trading account. I do suspect however, once the debt, or the negative margin eats into the capital on hold they would definitely close off your trade in order to protect you and themselves from further losses. (However, don't take my word as gospel though - there is that inherent risk of the market crashing tomorrow - who really knows right?) The question in the back of my mind is that, what will happen if the market does crash, or the position your are holding does crash through your stop loss limit (if you had taken the time and spent some money to take a guaranteed stop loss (GSL) then you would be safe), and through the margin you hold in your trading account? What then? That's a pretty big risk if you think about it - it is a probable event, but in my opinion unlikely. (But of course, you must be prepared to take any of the consequences if you dare to trade the markets) CMC Markets are famous for their derivative product: CFD's

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The Price of Holding a Position

Posted in Traders' Delusions, Submitted by Trading Critic on Fri, 2006-09-22 00:10.
When you trade with derivatives, especially utilising Contracts For Difference's (CFD's) your break even price is dynamic

When you trade with derivatives, especially utilising Contracts For Difference's (CFD's) your break even price is dynamic. If you trade with options and similarly with warrants, there is time decay to consider. With CFD's as well as forex contracts, the price of holding a position is much simpler than dealing with delta's that define decay with derivative instruments such as options.

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Unrealistic Returns and Benchmarks

Posted in Traders' Delusions, Submitted by Trading Critic on Wed, 2006-09-20 10:10.
Unrealistic returns and benchmarking in your trading

I was watching local Australian TV the other day and I cringed when I heard saw an advertisement for investment properties and this voice over stated:

xxx returned 109% over three years for their investors – try to match that with a bank.

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Compensation for the Lack of Disclosure

Posted in Miscellaneous, Submitted by Trading Critic on Wed, 2006-09-20 10:04.
Imagine getting compensation for the lack of disclosure by a company listed on a public stock exchange.

Imagine getting compensation for the lack of disclosure by a company listed on a public stock exchange. That's what happened on the 6th of September 2006 with Jubilee Mines (JBM), a Western Australia nickel miner. In a precedent decision, Jubilee was ordered to pay a former shareholder almost $2 million because the company failed to disclose to the market an important nickel find on its tenement. After ten years in the courts, the Supreme Court has found that the nickel miner should have released details of the newly discovered metal deposit when they become first aware of it back in September 1994. The former shareholder was the family trust of Kim Riley - the company's former managing director began selling Jubilee shares in that same month. The company only disclosed the find in 1996, and by that time the trust has released their entire share holding. Jubilee will be investigating avenues for an appeal.

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CMC Markets - Back in Business

Posted in Trading Services, Submitted by Trading Critic on Tue, 2006-09-19 01:19.
CMC Markets is back in business – it wasn't a glitch, the company was under ASIC review if their PDS

CMC Markets is officially back in business. Last Friday's occurrence was not a glitch. CMC Markets was under an ASIC review, from which, resulted in a new PDS which they released yesterday (Monday, 18th September 2006) which CMC Markets clients had to review before resuming trading. What I am not happy about is that CMC clients were kept in the dark and were not told of this review when their service was not available to open new positions.

Here was the FAQ email that CMC Markets sent out:

Dear valued client,
Due to an ASIC review of our current Product Disclosure Statement CMC Markets Asia Pacific is currently unable to extend or open new CFD positions on behalf of its clients.
What trading activities can I conduct during this interim period?
At present you may still place new orders for CFDs to reduce or close your existing CFD positions with CMC Markets.
You may still amend, cancel or replace pending stop-loss and limit orders.
When will CMC Markets be able to issue new CFDs?
We are currently working to issue a new Product Disclosure Statement (PDS). Once the new PDS has been issued CMC Markets will be able to issue new CFDs.
We anticipate this service will be available shortly.
Are there any technical difficulties with the Marketmaker® trading platform?
No. Your Marketmaker® trading platform is fully functioning to the high standards you expect from the CMC Markets service. However you are limited to the above parameters regarding your trading on Marketmaker®.
Can I trade over the telephone?
Yes, you may place orders (outlined above) over the telephone with our Sydney dealing desk. However, we advise that you use your Marketmaker® trading platform.

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CMC Markets Down

Posted in Trading Services, Submitted by Marco on Sat, 2006-09-16 10:36.
When looking for CFD dealers and stock brokers you want them to be perfect: here was a glitch that occurred with CMC Markets

Yesterday (Friday), I was looking on opening a new forex position using CMC Markets as my dealer. I was using their CMC Markets Mobile Marketmaker platform when every order I put through got rejected. I had the perfect entry, the perfect setup. Then after 10 minutes, the forex markets had already moved too much out of my entry zone so I got a little irritated. I had the right trading margins and everything. So I gave CMC Markets a call. It was all due to a glitch. This multi-million dollar CFD market maker/dealer with a huge amount of volume was stuffed for the day. And I thought this CFD dealer was perfect in every way. I guess, for those traders looking for a bad aspect about CMC Markets, here it is.

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Quality versus Quantity Forex Trading

Posted in Traders' Delusions, Submitted by Marco on Wed, 2006-09-13 10:01.
A different perspective on Risking a little or risking a lot: Quantity vs Quality trading

Just a similar thought to last week's post with the forex trading case study discussing the issues of risking a little or risking the lot. Similar concept, just a different perspective or twist.

Risking a little translates to a "Quality trade". You've put a little out, you're holding on for a large pip movement on the forex market. Armed with your trading system, which you've backtested and set your stops, you're ready for the large returns.

You have a large capital base. You want to risk the lot. (When I say "risk the lot" it isn't meant to be literal, I'm referring to large contract trades) Risking the lot is a quantity trade in two dimensions. One refers to the large contract size but secondly, this style of trading demands a larger number of trades. (Well, it's up to you how many trades you take, and perhaps "demand" is too strong a word for this context) [n.b. you must read the previous post so this article makes sense!] Actually it’s a lie, you don't have to take every possible trade, so if you're patient enough you don't have to take every possible trade. But since you are risking a lot you are only looking for a small pip movement to make a profit of the same magnitude compared to trading a little. And because it's only a small movement, this (may) allows you to take advantage of more volatile movements in the currency price. It's a matter of choice and it's up to you if you want to take the risk. However following this path may lead to another trading folly: overtrading.

Won't it be great if you can always have a good quality forex trade? Those are the trades I prefer... But the markets are dynamic, sometimes you've got to change your game play. But that's another story.

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Trading: Risk Little, Risk the Lot

Posted in Forex Trading | Traders' Delusions, Submitted by Trading Critic on Wed, 2006-09-06 13:41.
Forex trading: do you risk the lot or risk a little when you trade the foreign exchange markets

Traders are risk takers. We accept the market risks in the hope of making a killing making a living from trading the markets. Here I will discuss a case study on the consequences of leverage and the critical decision whether to "risk little or to risk the lot." I will use the forex markets for this case study. Similar concepts apply across other markets, but this particular concept works well with the foreign exchange markets due to their volatility. You may not agree with me with this case study and I reserve the right to change my position on this at anytime. Also, this is written for people with some experience in trading forex.

After trading the forex markets for a few years and a little reflection I came up with this thought: I can risk a little or risk a lot. You've got two choices and four outcomes. First you have the choice of either risking a little money or risking the lot. The secondary outcome for both cases is not your choice: it is up to the market to decide whether it shall go up or down.

Yes, so aren't you stating the obvious? What's the point? The point is, your initial choice of the amount of leverage is critical in determining your success in trading the forex market. But Marco? How did you arrive to that conclusion? Bear with me and you'll see. In this case study we will use the AUD/USD (Australian and US Dollar) currency pair, assume we are trading a standard contract size where each contract is worth $100,000 and so 1 pip equates to US$10. So in this case we will assume that we have a profit target of US$1000 for this particular trade. How we make that amount of profit, and the amount of risk you take on board depends on your fundamental choice (of risking a little or a lot) as well as the volatility of the particular equity. For the Aussie and US currency pair, it is quite rare to see 100 pip movements per day, unlike currency pairs such as EUR/USD (Euro/US Dollar). Typically the Aussie moves around 20 to 50 pips a day. That is the amount of volatility we are playing with. So to be realistic about your profit , assuming you are day trading and perfect "market conditions" (the market is going the way you set your trade), you should only expect to make 20 to 40 pips a day (that is in optimal circumstances - remember this is only a case study after all).

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